Of all the investment instruments the government has introduced in the fast several years, the Sovereign Gold Bond, or SGB, rose near the top of the popularity charts. Investors have bought SGBs worth Rs 72,274 crore in the 67 tranches of SGBs that has been issued 2015 onwards.
Thanks to the relentless march of gold prices in the global and domestic markets, the yellow metal has become the toast of investors with experts advising people to repose their faith in gold (and silver) since the quest for safe-haven instruments is expected to keep pushing up the price of these metals in future. However, reports indicate that while the demand of gold as an investment medium keeps rising, the Centre might not issue SGBs anymore.
Why could the Centre halt SGBs
One of the reasons, experts have pointed out, that is likely to be behind such a decision, is the rise in the continuous rise in the price of gold. In other words, it is turning out to be expensive for the government when bondholders are selling SGBs. The problem has been compounded by both rising prices of the metal as well as the appreciation of the dollar against the rupee. Like crude oil, India imports a lot of gold every year. And this import results in an outflow from the dollar reserves of the country. When Indian rupee becomes cheaper, it takes more dollars to import the same amount of gold.
How is redemption price of SGB calculated
It is clear from the formula to calculate the redemption price of SGB, how it will hurt the government. The redemption price of SGB is the simple average closing price of gold (999 purity) for the week before the maturity. As the price is rising continuously, the government has to pay a huge price during redemption. Furthermore, SGBs carry a 2.5% interest rate on the initial capital invested.
What are SGBs?
SGBs are gold bonds that have been issued by the RBI (Reserve Bank of India) on behalf of the government. They have a lock-in period of 8 years. They were issued to discourage the consumption of physical gold in India. An individual could invest a maximum money worth 4 kg of gold.
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